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Strategic Planning and Outsourcing

Table of Contents

Introduction
Summary
Generic Business Level Strategies
Outsourcing at Cummins Inc
Conclusion
References

Introduction

Strategic planning is very important in business management. Doing business entails managing scarce resources to ensure a good return on investment. While making decisions in business, there is the need for decision-makers to evaluate all factors involved in coming up with the best decision. Strategic planning defines a strategy or approach that would be used in a certain situation or while solving a certain problem. As the business environment change and new technology come into place, new approaches are being adopted in strategic planning. Outsourcing has become very important in todays business world, with many businesses choosing to outsource some of their activities.

Summary

Outsourcing has become an important strategic option in manufacturing. The aim of outsourcing in manufacturing is to concentrate energy on essential activities while outsourcing non-core activities to another company. Instead of trying to learn how to make every component needed for manufacturing, the focus is on avoiding manufacturing components that can be outsourced to another company.

As manufacturing companies decide to outsource some of their activities, there are various mistakes that can be done. The decision on whether to outsource some activities or not is challenging. In addition, deciding on the components that will be outsourced may have long-term effects on the business of a manufacturing company. Some companies continue to manufacture some components due to a sense of corporate responsibility, but such a decision may demean a companys profitability (Venkatesan, 1992, p.98). The decision to continue to manufacture some components with the aim of preserving jobs may not only add cost but also reduce efficiency in manufacturing. On the other hand, there could be mistakes while outsourcing the manufacturing of some parts. A company may decide to outsource manufacturing of parts that are hard to make while in-sourcing those that are easy to make. Such a decision can lead to complacency in workers that can result in to rise in fixed cost, a decline of product differentiation, and also stagnation of manufacturing performance (Venkatesan, 1992, p.99). The best decision for outsourcing in manufacturing companies should be to outsource manufacturing of parts that inhibit a company from making good use of its skills and resources.

Generic Business Level Strategies

With the increase in businesses, the competitive advantage of a company is very important. Generic business-level strategies aim at enhancing a companys competitive advantage as well as increase value to the customers.

Differentiation as a strategy for competitive advantage consists of the ability to create unique products that are appealing to customers. There are many products in the market from which consumers can choose. The uniqueness of a product to other products in the market is important to competitive advantage (Kozami, 2002, p. 87). The uniqueness can be achieved through innovation, creativity as well as specialization. Outsourcing can either promote or inhibit differentiation depending on how it is conducted in a manufacturing company.

Outsourcing in manufacturing entails transferring the responsibility for manufacturing some parts to external companies. From the article, various managers were concerned about losing the uniqueness of their companys products through outsourcing. The main challenge to managers was to identify the components that could be outsourced. Some companies choose to outsource the components that seemed to be hard to make. Such a decision may lead to a company outsourcing core components of their products or those components that make their products unique (Venkatesan, 1992, p.103). Since differentiation results from the uniqueness of products, outsourcing manufacturing of core parts may deny a company the competitive advantage that results from differentiation. Fear of loss uniqueness leads some manufacturing companies to opt not to outsource.

Differentiation is possible with outsourcing in manufacturing companies. The success of outsourcing lies in the ability to distinguish core parts from commodities. A manufacturing company should focus its energy on manufacturing components that are core and unique to their products while outsourcing those that can be done by another company.

Cost is a major factor in competitive advantage. Cost leadership constitutes the ability of a company to reduce production costs through efficiency in production (Harrison & John, 2009, p. 213). This generic business-level strategy aims at looking at all options that can be used to reduce costs in all areas of a business. Outsourcing in manufacturing is a good strategy for reducing costs. Outsourcing productions of some components to other companies allow for efficient use of resources. In addition, outsourcing allows a manufacturing company to focus its energy on areas where it is best skilled (Venkatesan, 1992, p.111). Outsourcing companies have the skills and capacity to manufacture some parts at a lower cost. For some parts, the cost of outsourcing is far lower than the cost of manufacturing the parts within a company.

The decision to outsource should be made with reference to competitive advantage. Outsourcing should not be an additional cost or an inhibition to business efficiency. The first step is to identify the business activities that can be outsourced. To do this, core and subsidiary activities should be differentiated (Harrison & John, 2009, p. 217). The activities that do not core to a company could be outsourced to another company. The capability of suppliers to handle outsourced activity is very important. The supplier should be able to perform the outsourced activities with efficiency and avail the supplies on time. Reaction from employees should not be ignored. Outsourcing should not be used to intimidate employees but management should take time to explain the need for outsourcing.

Outsourcing at Cummins Inc

A good example where outsourcing has been successful is at Cummins Inc. Cummins Inc deals in diesel and natural gas engines. In the 1980s, legislation requiring less emission in the air necessitated Cummins to come up with new pistons to meet the requirements laid down in the legislature. The company had two options; either rebuild their pistons or outsource the pistons to a supplier (Venkatesan, 1992, p. 104). Although there were various potential suppliers, the decision to outsource was not easy. Developing its own piston required a lot of investment while outsourcing manufacturing of the pistons seemed to be a dangerous decision since the piston is core to an engine.

The deadlock in making the decision was broken by a team set up to address the issue. The team is constituted of representatives from all major departments in the company. After investigations, the team discovered that Cumminss internal capacity to develop the pistons was low as compared to potential suppliers. The team also observed that Cummins could not be able to keep up with innovation in the suppliers nor invest enough resources as the suppliers did (Venkatesan, 1992, p. 105). The team concluded that the best approach was to outsource the pistons. This decision allowed Cummins to avoid heavy investment in pistons manufacturing while using the resources in their areas of strength.

Conclusion

Outsourcing is one option for implementing generic business-level strategies. Generic business-level strategies aim at increasing a companys competitive advantage through various approaches. Outsourcing some business activities to a supplier enables effective use of resources that can reduce cost and increases competitive advantage. Decision on the activities to be outsourced is very important. The fear of loss of differentiation can be overcome by outsourcing non-core activities while the core activities are performed in the company.

References

Harrison, J. & John, C. (2009). Foundation in Strategic Management. New York: Cengage Learning.

Kozami, A. (2002). Business policy and strategy management. New York: Tata McGraw-Hill.

Venkatesan, R. (1992). Strategic Sourcing: To make or not to make. Harvard Business Review.

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